Thursday, November 11, 2004


Joe Katzman of Winds of Change prompted this piece I wrote around 1 Sept 2003. Joe has a very nice intro which you might like to read.


by M. Simon

I've been studying one of the most fascinating practical economists of our time: Hernando De Soto of Peru. What makes him so interesting is his belief that lack of property rights is what's holding back the developing world.

What is property? Proudhon said that property is theft. My contention is that taxation is theft; but I will leave that question for another day. Today I want to talk about property. What is it. Who has it. Why we want it. How it increases wealth. How when we legalize it violence decreases. And possibly a few other things as well. Oh yeah, and why lack of attention to property rights contributed to America's loss in Vietnam. Plus how economies are really built from the bottom up. And why Grameen Banks are a very good idea, and the World Bank is not.

Let us start with property in its very smallest sense. If you give a two year something and tell him that it's his, the two year old automatically gets it. He'll defend his property unless some deal is made. So even 2 year olds get property. They have to be taught to share, but ownership they get.

It looks like property is built into the brain. We know property is attractive to women because ugly old millionaires have no trouble getting women. So property is important. Why? It helps insure reproductive success. What is reproductive success? Grandchildren. Stored wealth - property - helps insure grandchildren.

So we know why people like property. Reproductive efficiency.

Let's look at some of the ways property is dealt with in the world. In some places, only the government can own property. These places do not work too well. In other places, a clan is responsible for property with some individual property rights. These places work a little better. In other places, people have squatters rights to property not recognized by government; these places do better yet. The best places of all are where the individual has tradable rights in his property recognized by the government.

How did all this develop, and why it is good? A good place to start is Egypt many thousands of years ago. The important thing about Egypt is the predictability of the Nile floods. Under those conditions, fixed site agriculture can be really profitable if you can keep out marauders and settle land disputes without violence.

To settle land disputes without violence, you need surveying. Once you have surveying, parcels of land can be traded. Once you can trade property, you are no longer bound by your tribe. You are, however, bound to those who guarantee your property: the nation. So with tradable property, loyalties can expand. Of course in exchange for property guarantees and the tradeability of property, you get taxes to fund the government that is providing protection. You get to pay for civil servants who record and enforce property boundaries, and the army that keeps out marauding invaders. Very expensive. But cheaper than property fights and marauding invaders. Everyone profits.

Now, to maintain titles you need land records. This means a recorder of deeds and boundary markers, plus angle and length measurement instruments as a check on the boundary markers. So advanced math is developed. Geometry came of necessity. No geometry, no land title... and maybe vice-versa.

So that's how you handle a formal system of property. In many places where there is no transferable title that is recognized nation-wide, people are in effect slaves to a traditional plot of land. That is, there may be title but it is not negotiable because it is informal.

Along comes De Soto. De Soto says this about poor people in the developing world:

"They do have assets, as a matter of fact, trillions of dollars, but they're not paper rights in a property rights system, so their value cannot travel and actually insert itself into a diversified market."

This is what happens in developed economies. In the United States, a family's home is the main source of small business capital. In many countries, however, this is impossible. De Soto says the main problem is law, and his illustrations of the truly ridiculous lengths one must go to in order to secure legal property ownership make a powerful case.

The problem is, you cannot easily import law to a given place. The reason is that the traditional informal property rights already have their own set of traditional rules, justified by local conditions.

To solve this problem of local property rights, therefore, laws have to be drafted recognizing traditional property codes. When that happens transition to a formal property system is relatively painless. When that does not happen you get revolt. In Vietnam neither the government of the South nor the American government recognized the traditional property rights system. The North Vietnamese promised to respect those rights and got the support of the peasants in the countryside. In part we lost the war because we failed in what should have been our strong suit - respect for private property. Of course there was more to it than that - we did respect the property of the formal land holders but not the property of the squatters actually working the land.

De Soto says:

"The law is something that you discover and then you systematize to make it standard so that everybody can participate in a larger market. And a division of labor, which is what creates prosperity, is then possible."

He goes on to note that this process of legalization of property is going on all over the world, but it's going on very slowly. His institute's efforts work to identify the essential wealth generation processes, and implement them as quickly as possible. This, he says, is the real way out of poverty.

I think the implications for Iraq are obvious. We must find out the property system in effect in various sections of the country. Codify them and try to harmonize them. The rights of squatters who have made improvements on the land must be respected, while the rights of the legal land owners must also be given some consideration.

Which brings me to development. The creative power of individuals is never unleashed from top-down investment. What you get from that is theft and corruption. It is released by bottom-up economic development, which is why Grameen Banks (bottom up) do more for developing countries than the World Bank (top down). If we can get property working too, there is more money untapped in traditional property rights than have ever been invested in the third world for the last 100 years. Which means we can go beyond small investments, and get middle size investments working as well.

Faster growth. Fewer poor people. From property.

More De Soto Resources:

Some interviews with De Soto and reviews of his books can be found here:

        * Reason Magazine Interview
        * Several De Soto quotes above were from this PBS Jim Lehrer News Hour conversation.

© M. Simon - All rights reserved.

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